Thursday, 22 May 2014

EGYPT: Pressing Issues Awaiting the Next President

Egypt's presidential elections will take place on May 26 and 27. The results are expected by 5 June, and if a second round is necessary it will be held by mid-month, with results announced no later than 26 June. Only two candidates, Hamdeen Sabahi and Abdel Fattah el Sisi, are submitted to the Supreme Election Committee, which obviates the need for a run-off.

Hamdeen Sabahi is a former presidential candidate in the 2012 presidential election, officially announced his presidential bid on 8 February 2014 and Abdel Fattah el-Sisi is a former Army chief.

One of the toughest challenges facing Egypt’s next president will be the troubling state of the country’s economy. Answers to the questions of where to start, what to do, and how to do it are all critical for success or failure in this regard. But two economic issues in particular will be most challenging for him: restoring the country’s macroeconomic stability and meeting the needs of the Egyptian people for jobs and better living conditions.

Egypt is currently in a state of fiscal lassitude. For three years now, fiscal deficit and public debt have been soaring, approaching, respectively, 14 percent and over 100 percent of gross domestic product (GDP). Continued domestic borrowing to finance the growing deficit has increasingly exposed the banking sector to government debt, crowded out private investment, and resulted in sluggish economic growth that—at an average of 2 percent a year—was barely above the population growth of 1.7 percent.

Declining dollar receipts from tourism and foreign investment created balance of payment difficulties that depleted international reserves and weakened national currency. These imbalances ultimately led to higher unemployment and inflation rates, and stagnant per capita income.

Three times since January 2011, Egypt attempted to negotiate an agreement with the International Monetary Fund (IMF) to stabilize its battered economy, only to suspend talks before they come to fruition, mostly for fear of what an IMF-supported program could do to an already fragile socio-political domestic setting.

Gulf aid disbursed after the ouster of the Islamist President Mohamed Morsi from power last summer provided much-needed short-term financial respite. But this generous lifeline, however, is not expected to last for long.

As things stand at present, the country’s macroeconomic picture is a bleak one, and absent urgent reform measures, Egypt’s fiscal health could get much worse, as projected by the IMF and by the country’s own Ministry of Finance. Egypt may find itself in need of the IMF again for the Fund’s money and its technical expertise, and for the international financing that could come after an agreement is signed. The future leadership of Egypt has to decide how soon this will happen, under what terms, and at what social cost.

Dealing with the country’s widespread poverty and high levels of youth unemployment represent equally pressing issues awaiting the new president of Egypt. These two socially explosive problems were among the main forces that ignited the popular revolt against Mubarak regime in early 2011, and both have worsened over the past three years.

Over a quarter of the Egyptian population (26.3 percent) lives under the poverty line of 2 dollars a day, with another quarter hovering just above the line. Government policies that for decades provided social protection for the poor—through generalized subsidies for food and public utilities; free education and health services; and low cost housing—have all proven, over time, to be costly and inefficient.

More importantly, these subsidies are no longer fiscally affordable. Worse still, high economic growth rates during a good part of the last decade of Mubarak’s rule, an average of 6 percent a year, not only failed to “trickle down” and lift people out of destitution, but were in fact associated with a rise in the country’s poverty (from 16.7 percent in 2000 to 25.2 percent in 2011). Thus Mubarak-era policies increased the poor’s dependence on government assistance for survival and further squeezed the state budget.

With poverty so prevalent and effective social safety nets lacking, the challenge facing Egypt’s next president will be how to restore the country’s macroeconomic balance (which would necessarily entail some sort of austerity measures) without setting off unrest in the streets if such measures were perceived, rightly or wrongly, by the Egyptian poor as adding more hardship to their already strained daily lives.

High levels of youth unemployment will represent another serious challenge for the new president. General unemployment in Egypt currently stands at 13.4 percent; nearly 70 percent of the unemployed are between 15 and 29 years, and over 80 percent are educated. Each year, over seven hundred thousand young Egyptians enter the job market for the first time, thus adding to the severity of the problem.

With an already bloated government sector that no longer guarantees automatic employment for college graduates (a state policy that was in place from the 1960s to 1990s) and a non-dynamic private sector that increasingly operates under a highly problematic business environment, the only option left for most Egyptian youth seeking employment is in the informal sector, where jobs are largely characterized by low pay and low quality, with no work benefits and no prospects for career growth.

The socio-political ramifications of continued youth exclusion from the formal economy could prolong the current state of instability in the country. Therefore, policies and programs to generate short-term employment for youth acquire a sense of urgency. Creating productive and sustainable jobs in the medium- and long-term, however, will require a firm political commitment from Egypt’s new leadership to embark on structural reforms needed to create a level-playing-field business environment and to unlock the potential of the private sector.

The newly elected president will be challenged to undertake these reforms in the presence of vested-interest and politically connected business groups that may either resist reforms or, if and when implemented, make sure to benefit from them to the exclusion of others.

These are the most formidable economic issues that will face the new president of Egypt upon taking office early next month. Tackling them will not be easy, but it is not impossible either. At the present time, there is a strong belief among the country’s policy makers, and outside the government as well, that fiscal reforms (mainly energy subsidy reforms, along with broadening the tax base) are the only way out of Egypt’s mounting economic troubles.

International observers also warn of potential crises ahead if such reform measures were to be delayed. With reforms implemented, all other things being equal, the economy is projected by the IMF to grow between 4 to 4.5 percent a year; perhaps not adequate to make a significant dent in poverty and youth unemployment, but enough to put the economy on the road to recovery.

A word of caution, however, is in order here. Experience in the Arab region and elsewhere has shown that how growth is realized, and where it comes from, are as important as, if not more so than, the economic growth figures themselves. After all, high growth rates do not necessarily translate automatically into extra income for the poor or more jobs for the unemployed. That was the unmistakable lesson of the “fast growth model” Egypt followed during the last decade of Mubarak’s presidency.

The next president of Egypt, therefore, will be highly advised to keep this important policy lesson in mind when searching for the right economic growth strategy to address the serious challenges facing his country.